Retrospective tax: Will Vedanta's Sesa Goa acquisition be next?

Undeterred by Vodafone's relentless lobbying and pressure from the British government, the finance ministry on Wednesday said it will move ahead to recover the tax and penalty from the British telecom major Vodafone, which is currently estimated to be Rs 20,300 crore.

The government on Tuesday got the Lok Sabha to endorse its proposal to amend the Income Tax Act from 1962 in a bid to tax overseas acquisitions involving interests or assets in India.

Vedanta Group bought majority stake in Sesa Goa through the acquisition of Finsider International for $981 million in 2007. Reuters

The finance bill has a retrospective amendment - in the form of a clarification - that allows the government to tax any deal involving assets in India even if the deal is struck outside the country. And the retrospective tax amendment now seems to have become the government's strongest fiscal weapon.

According to a report in the Economic Times, the income-tax department is set to go after various past deals involving full or partial ownership of assets in India, the total tax on which could amount to Rs 40,000 crore! The I-T department has already made a list of cases where it believes the retrospective amendment could have an impact, said the report.

Retrospective amendment has already led to opposition from many foreign governments, global trade groups and companies. But the government, while passing the Finance Bill, defended its right to tax overseas transactions of companies that realise capital gains from the sale of their Indian assets. "There cannot be a situation that somebody will make money on an asset located in India and will not pay tax either in India or to the country of its origin... because of making some arrangements through certain tax haven areas through a complicated setting up of series of subsidiaries and having huge capital gains on the assets located in India," he had said in Parliament on Tuesday.

Since Mukherjee said the retrospective amendment will not affect deals in which assessment has been closed or the ones routed through the 82 countries with which India has DTAAs, deals like Sanofi Aventis buying out Shantha Biotech will be covered by the Double Taxation Avoidance Agreement India has with France.

Among the Vodafone-like deals is the $150-million Idea Cellular-AT&T deal which was transacted in Mauritius, with which India has a DTAA pact. However, Vodafone continues to remain in a spot as the Vodafone-Hutch transaction had taken place in Cayman Islands, with which India does not have a DTAA pact. Also, it is a case where assessment order has already been finalised.

Finance ministry officials told the newspaper that deals under the scanner include "SABMiller's acquisition of Foster's India, Vedanta Group's purchase of a majority stake in Sesa Goa through the acquisition of Finsider International, and General Atlantic and Oak Hill Partners' buyout of GE's 60 percent stake in Genpact." Cases related to taxation from many of these deals are already pending in various courts across the country.

Dinesh Kanabar, deputy CEO and chairman of tax at KPMG called the proposed retrospective amendment in tax rules a "big negative". "If an assessee gets an answer after years of litigation only to find the law amended retrospectively, why litigate?," he told Reuters.

The income tax department has maintained that Vodafone would have to pay Rs 7,900 crore as capital gains on Hutch's acquisition. In addition Finance Secretary RS Gujaral said the company will have to pay another Rs 7,900 crore as penalty and interest, which at that time had been computed at Rs 4,300 crore.

Even though it not known what Vodafone's next step would be, a CNN IBN exclusive report says that the telecom major has threatened to take legal action against the Indian government, saying it has been denied justice.

Speaking to CNN-IBN, Vodafone's External Affairs Director Matthew Kirk said, "There is only one example in any other jurisdiction in the world of a Supreme Court judgement being overturned by retrospective tax legislation. That was in Moldova, and the law in that case was subsequently over turned by a Human rights court on grounds of right to fair trial. So we will use any avenue available to us to look after our shareholders interests."

However, as a Firstpost earlier pointed out, even if Vodafone challenges the retrospective amendments, it may never get its money back!

"The reason why it may not get its money back lies in Item 113 of the Finance Bill. The item, criticised for its breathless length, is harsher in what it attempts to do. It is draconian and pointed mostly at Vodafone," Menaka Doshi of CNBC TV18 hadreported earlier.